China Squeezes Foreigners for Share of Global Riches

BEIJING—Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world’s biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe.

Bloomberg NewsLin Zuoming, left, president of Aviation Industry Corp. of China, with GE CEO Jeffrey Immelt, announcing plans last year for an avionics joint venture.

General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market.

General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well.

The two deals show China Inc.’s growing international ambitions, as well as its increasing leverage over foreign partners. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE’s existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market.

Several forces are motivating China’s foreign partners to strike global deals that would have been unthinkable a few years back. China’s big government-backed companies now have enormous financial resources and growing political clout, making them attractive partners outside China. In addition, the Chinese market has become so important to the success of multinational companies that Beijing has the ability to drive harder bargains.

But such deals also carry risk. Several earlier joint ventures inside China have soured over concerns that Chinese partners, after gaining access to Western technology and know-how, have gone on to become potent new rivals to their partners.

“Foreign partners are seeing they will have to sometimes sacrifice or share the benefits of the global market with the Chinese partner,” says Raymond Tsang, a China-based partner at consultancy Bain & Co. “Some of the [multinational corporations] are complaining. But given the changing market conditions, if you don’t do it, your competitors will.”

Big energy companies, too, have been pursuing international deals with Chinese companies. China has supplanted the U.S. as the world’s biggest energy consumer, making access to its market vital for global companies. Foreign firms hope that teaming up with Chinese companies abroad will help on that front. Foreign companies supply technology and experience, and their Chinese partners provide geopolitical clout, low-cost labor, and easy access to credit that China’s government-backed companies enjoy.

State-owned China National Petroleum Corp. was one of the first foreign oil companies to sign a major contract in Iraq. BP PLC teamed up with it last year for a $15 billion investment to increase output at the giant Rumaila field. Over the summer, Royal Dutch Shell PLC joined with PetroChina Co., a publicly traded subsidiary of China National Petroleum, on a $3.15 billion acquisition of assets from Australian energy company Arrow Energy Ltd.

China has been gaining clout in some resource-rich parts of the developing world where U.S. companies don’t have strong footholds, partly by spending lavishly on infrastructure projects, and it can help broker deals in places like Venezuela and Myanmar, where it has good relations.

In financial services, foreign banks long have coveted access to China’s fast-growing securities business. China has allowed a number of companies into the market in recent years through joint ventures, with their stakes capped at about 33%. Chinese regulators also restrict which parts of the securities business they can do.

Crédit Agricole SA already is involved in such a joint venture through its Asian brokerage arm, called CLSA Asia-Pacific Markets, but it is a minor player in China. In May, its investment-banking unit announced a preliminary deal with China’s government-owned Citic Securities Co. to form a joint venture beyond China’s borders. The French company plans to contribute CLSA and other pieces of its international operation. Citic Securities would throw in its small international unit, based in Hong Kong. Crédit Agricole hopes that helping Citic Securities realize its international ambitions will enable the French bank to expand its business in China.

But talks have gone slower than expected. The two companies said this month that they had agreed on certain key terms, but extended a year-end deadline for a final deal to June 30, without explaining the delay.

Some joint ventures in China have stumbled because of spats with local partners or because the partnerships enable Chinese companies to learn enough about industries to become new competitors to their Western partners.

Kawasaki Heavy Industries Ltd. and Siemens AG, for example, worked with Chinese partners to help build China’s high-speed rail network. Now the Chinese companies are bidding against them for international contracts—using products at least partly based on the foreign firms’ technology. Last year, France’s Groupe Danone SA accepted a cash payment to terminate its joint ventures with China’s Hangzhou Wahaha Group Co. after a nasty public feud. The French company had alleged that Wahaha’s boss had produced and sold Wahaha-branded beverages supposedly owned by the joint venture through a separate network he owned. Wahaha denied the accusation.

GE’s avionics deal with Aviation Industry, or AVIC, also is vulnerable, says Jim Wasson, president of Growth Strategies International LLC, an aerospace and defense consulting firm, and a former GE Aviation executive. The fear is that “once AVIC knows enough about how to do this, they’ll kick [GE] out and be on their own,” he says.

Lorraine Bolsinger, chief executive of GE Aviation Systems, acknowledges there were concerns within GE about protecting technology. “It was very controversial,” she says of the proposed deal. “It was really us knuckle-dragging technology guys that think we had a lot to protect.” In the end, she says, “when we and the Chinese together create intellectual property, we are darn right going to protect it.”

These days, big Chinese state companies with access to cheap funds and other government support are gunning to dominate some of the same industries that firms like GE have targeted as growth opportunities, from clean technology to turbines.

Even so, GE has such high hopes for China that Mr. Immelt has called it “our second home market.” Two years ago, Mr. Immelt said China revenue would double to $10 billion by 2010. But last year it reached just $5.3 billion.

GE saw working with AVIC as a chance to boost its avionics business, which has lagged behind Honeywell International Inc. and Rockwell Collins Inc. The planned venture, to be based in Shanghai, has been chosen to supply China’s planned C919 jet, which has the potential to grab a big slice of the Chinese civilian-aviation market. Boeing estimates that market will be worth more than $400 billion over the next 20 years, second only to the U.S.

In negotiations, GE is asking AVIC to match the value of the technology GE is contributing with a cash investment, according to people at GE. If a deal is finalized, all of GE’s existing and future civilian avionics contracts will go to the joint venture. Negotiations were supposed to be done by mid-2010, but the parties now hope to finish them by early 2011.

GE executives say the AVIC deal is their closest cooperation ever with a Chinese partner. GE has 45 people in China on the project now, and it is hiring or moving several hundred more people there, even before final terms are hammered out.

AVIC, which makes fighter jets and helicopters in addition to civilian products, has ambitions outside of China. “For the aviation industry, there is no regional market, only the global market,” the company said in a statement. “AVIC’s strategy is to actively integrate itself into the industrial chain of the world’s aviation industry, and to become a truly global company.”

Last month, China unveiled the first life-size mock-up of the C919. Other foreign companies have negotiated similar joint ventures to make other parts.

“Our hope and desire is that this joint venture maintains a working-together partnership that benefits both,” says Kent Statler, executive vice president at Rockwell Collins, which has a joint venture to supply the C919 with communications systems. “But let’s not be naive. We realize that this could turn into a competitor.”

For GM, the stakes are especially high: China became the world’s largest auto market last year.

Back in 1997, GM decided to plow more than $1 billion into a 50-50 joint venture with SAIC to make Buicks. At the time, it was seen as a risk because car sales had yet to take off in China. This year, GM’s China ventures are on track to sell nearly 2.27 million vehicles in the country, compared to 2.18 million sold by GM in the U.S., according to research firm IHS Automotive.

Much of GM’s recent growth in China has come through a second joint venture set up in 2002 with SAIC and another Chinese company. The venture, SAIC GM Wuling Automobile Co., makes boxy microvans costing as little as $4,500, which have proven popular in China’s smaller cities and towns. Last year Wuling became the first brand in China to sell a million cars in a year. This year, it’s expected to account for nearly one-sixth of GM vehicle sales world-wide. Last month, GM reached a deal to buy an additional 10% interest in Wuling for $51 million from the venture’s third investor, raising GM’s stake to 44%. SAIC owns 50%.

The India joint venture, which began operating in February, is part of GM’s effort with SAIC to replicate its China success in other markets. It will produce cars based on its Chinese Wulings, but will sell them under the Chevrolet brand. GM contributed its brand, India factories and dealer network, while SAIC contributed about $300 million to $350 million, a senior GM executive said when the deal was announced.

“We think the business model we have in China with SAIC and the product lineups we have in China are ripe for export to other parts of the world,” says Kevin Wale, chief of GM’s China operations.

GM and SAIC already have made less ambitious forays abroad together. They export Chevy Sail compacts designed and made in China to Chile and Peru, and are jointly developing more new models to be sold globally, such as the Buick LaCrosse, a sedan designed by teams in Shanghai and Warren, Mich., and sold in China and the U.S.

The India deal takes that cooperation a step beyond shipping jointly produced vehicles overseas. GM and SAIC executives and engineers will be posted in India to design, produce and market cars locally—something SAIC currently has almost no experience with.

One risk to GM is that the venture will better position SAIC to compete abroad on its own—against GM.

Already, SAIC has grown into a powerhouse at home, in part through learning from GM. In 2006, SAIC launched its own solo brand in China, called Roewe. It now competes domestically with the Buicks that SAIC makes with GM. The Roewe brand, which is based it on technology acquired from the now-defunct MG Rover Group Ltd., along with a related nameplate, MG Mingju, sold 146,323 cars in the first 11 months of this year, up 78% from the year-earlier period, according to J.D. Power & Associates. Buick’s sales in China, while more than three times as large, grew one-third as fast over the same period.

Last year, GM agreed transfer 1% of its stake in Shanghai GM, its main Chinese joint venture, to SAIC, giving its Chinese partner 51% and effective control. GM said at the time the move would give it better access to credit from Chinese banks, and pave the way for its bigger stake in the Wuling venture.

Last month, GM said the two companies are looking at the possibility of selling SAIC’s MG-branded cars through GM’s world-wide sales channels. The move could open the door for SAIC’s cars to make inroads into Britain, where the MG brand was once based, according to an individual close to GM. Also last month, SAIC paid $500 million for a 1% stake in GM as part of the Detroit auto maker’s initial public offering.

SAIC is “very well situated to meet Western [car companies] head on,” says Michael Robinet, a U.S.-based senior analyst with consulting firm IHS Automotive. “There’s no doubt in my mind, MG and Roewe are going to be both very good launch pads for SAIC to look at new markets beyond China.”